The Hour Glass

[Choon]

[attachment=1772][attachment=1772][attachment=1772][attachment=1772][attachment=1772]Choon pid='161949' dateline='1621741079']

https://links.sgx.com/FileOpen/THGL_FY20...eID=667107

very resilient luxury sector business and good results for FY2021! cash pile and increased dividends!
plenty of rich people buying watches!! buy-buy-buy!!

Huat har!!

The results headlines were PATMI grew 8% while revenue dropped 1%.

 In THG's usual understated manner, not emphasised were that operating profit and associates results increased by 23% and 45% respectively.

Masking the double-digit growth in underlying business performance (operating profit and associate results) was a fair value loss on investment properties.

While THG should have received and benefited from some temporary COVID-related grants/subsidies, I suspect that stripping away such benefits, underlying profit could still have grown by double digits.

It seems to me that after taking into account:

(1) the net cash of S$143M on the balance sheet, and
(2) adding back the S$10M fair value loss on investment properties,

even at share price of $1.50 (about 40% upside from current price of $1.08), the valuation is very undemanding at just 9.9X historical PE (see attached for rough calculation).

Issue I think is whether liquidity would come to the stock and accord the stock a decent valuation.

[weijian]

Yes. That much is true about severe shortage for many collectable luxury items, not just watches. The shortage not only is causing prices to rise, it also means that those who cant wait(usually at least a few months) will have to settle for less desirable models. (aka old inventory) More old inventory is cleared during this pandemic than all of the last 3-5 years if my sources are accurate.

THG's FY21 results show that inventory turnover (180 days) is at a low for the last X years. It used to be much lower in the years before/after GFC2008 (130-160days) but probably the business model was slightly different then. There are currently more mono-brand shops and the online evolution, both which requires more stocking of inventory I suppose. Dr Henry Tay's goal for inventory turnover is 180days - but I would bet that this inventory turnover isn't sustainable in time to come.

The biggest surprise for FY21 is probably the higher payout dividend ratio of ~50% compared to the earlier average ~20%-30% in prior years. This is despite the fact that a new cycle of "expand via loans-earn the money-pay down the loans with earnings" with all Aus/NZ business/properties purchased in the last 2 years, has just begun. Has the Tay family been stealing envious glances at their Cortina counterparts? Or is it about time that the Tays decide that more needs to go towards the Trust for the benefit of family?

"Is this a payout ratio a new normal" is probably the biggest question moving forward, and let's hope Dr Henry Tay delves a little bit more in the coming AR.

P.S. THG has naively left out stating the amt of gov support and grants...this is typical for a privately owned business. Based on what I have seen, one should be expecting SGX to query them to publish the numbers soon..

[wj1984]

I have been following this thread for a while before i registered because i partly gain some interest in watches...

Have also done a case study during my post grad degree on THG being a viable investment (corp finance) back in 2015. Back then my team did not think THG was a viable investment because of the following:-

1. The years after GFC and before 2015, THG was holding a large inventory but these are 'dead' inventory (think of those obscure & unpopular brands like hubXXX etc, these exact watches are going for half price in the GREY market). The inventory numbers keep going up Y-O-Y
2. THG would probably have to do a write-off sometime down the road as the longer they hold the watch new designs / movements will come out and consumers will no longer want the earlier models

However 2016 was the turning point; Rolex came out the highly popular Daytona ceramic which spark a worldwide interest in watches again (namely Rolex / Patek) and it turned things 180 degree

1. Bundling came into effect; you want a desirable watch, buy something from THG inventory at no discount. This is evident in many places (check ROCA fb page, rolexforums etc.)
2. Even though revenues remains flattish but margins definitely improved because previously they will giving discounts on hard to sell models. Now little to no discount are offered.

Going forward i think THG will continue to do well so long as they are able to hold their distributorship for marquee brands (sincere lost a couple of important brands and subsequently their downfall) and the interest in watches remain high.

[alanyeoinvest]

My analysis on Cortina and HourGlass

https://alanyeoinvest.com/2021/06/07/sin...sitioning/

[Choon]

My analysis on Cortina and HourGlass

https://alanyeoinvest.com/2021/06/07/sin...sitioning/

In my view:

- your valuation seems to have missed out the net cash on THG's balance sheet;

- discount rate of 10% is too high (I don't think that THG's business faces a higher risk than the large companies on SGX e.g. ComfortDelgro, SATS, SIA, SIAEC, Singtel, Sembcorp, Keppel. In fact I think THG has executed better in the past 10 years, in part due to it being family-owned and being more focused on the long-term. So unless you also discount these other companies by 10%, otherwise I think 10% discount rate for THG is too high.

- terminal growth rate of 5% is too high (if THG is worthy of a terminal growth rate of 5%, then what high rates need to be ascribed to the likes of Apple, Tencent, Alibaba).

[Choon]

My analysis on Cortina and HourGlass

https://alanyeoinvest.com/2021/06/07/sin...sitioning/

In my view:

- your valuation seems to have missed out the net cash on THG's balance sheet;

- discount rate of 10% is too high (I don't think that THG's business faces a higher risk than the large companies on SGX e.g. ComfortDelgro, SATS, SIA, SIAEC, Singtel, Sembcorp, Keppel. In fact I think THG has executed better in the past 10 years, in part due to it being family-owned and being more focused on the long-term. So unless you also discount these other companies by 10%, otherwise I think 10% discount rate for THG is too high.

- terminal growth rate of 5% is too high (if THG is worthy of a terminal growth rate of 5%, then what high rates need to be ascribed to the likes of Apple, Tencent, Alibaba).

I use a simple valuation model to value THG:

1. FY2021 underlying earnings = S$92M (with adding back of S$10M fair value loss on investment properties);
   
2. But investing/valuation should be about one's belief about where the company will be in the future;
   
3. So assuming 3% earnings growth per year, Year10 net profit would be S$124M, average net profit over 10 years would be ~S$110M (for a round number);
   
4. As an owner, THG would earn me on average S$110M per year for next 10 years;
   
5. Ascribing 15X PE to S$110M = the business has a value of = S$1,650M;
   
6. Why 15X? I don feel that one should use 15X when one is considering to BUY (margin of safety considerations). But I don think that one should sell unless it reaches at least 15X (let a good business/investment compound and enjoy the ride considerations);
   
7. Adding net cash of ~S$140M (as at Mar2021) to S$1,650M = the company is worth = S$1,800 (for a round number);
   
8. I do not add the value of THG's investment properties because THG does not have a intention to realise their value through selling them, rather THG would likely covert them into boutiques for its core business.
   
9. S$1,800M divide by 704M shares = $2.50 per share.
   

Comparing $2.50 with the share price now and 6 months ago, $2.50 looks aggressive.

But does the valuation assumptions above look aggressive? From a value investing perspective, I truly don't think so.

[dydx]

The ultimate fair value for THG as a business would be realised when a well-funded buyer - e.g. possibly a party of LVMH class or a major international PE fund - has a strong strategic reason to want to buy up the whole THG business, and the Tay Family as the major/controlling shareholder of THG has a need or an urge to sell, and the 2 sides feel very good with each other in the negotiation. It is conceivable that when the stage as briefly described above happens, a deal would be done at a princely price or a high valuation - my own guess is at least 2.5x NAV, which is not too demanding as THG has quite a bit of extra hidden value in some prized retail/commercial properties.

For the layman investors, some would simply follow their instinct to buy into THG as a long term investment after visiting one of their prominent shops - e.g. the one in Taka - to look for or buy a pair of Rolexes as a remembrance gift for a special occasion. They would marvel at what a beautiful watch shop it is and may even have an urge to want to buy the whole shop if it is for sale.

[brattzz]

THG can REITS it's retail/commercial properties too! another recurring revenue stream!

[weijian]

The euphoria of VBs is probably a sign of whether there is still good value in THG for now. VB ¯|_(ツ)_/¯ can attest to that very well.

It was only a little while ago when VB Karlmarx made an astute observation that THG's market price seldom deviate too much from NAV. While Tay senior/junior has been doing great work, but its core business hasn't materially changed.

VBs BigToe and wj1984 shared some positive news on its inventory but is it sustainable when the world returns to normality (or the new norm)? Along the lines of specuvestor's asset/business/structure framework, something probably has to change with its structure, to have a permanent re-rating above NAV.

[d.o.g.]

In my view, THG is ultimately constrained by its business model. The luxury watch dealer business is one where the brandowners hold all the cards.

The case of Sincere Watch may be instructive for current and potential investors of THG. Tay Liam Wee had a great relationship with Franck Muller and Sincere were given very generous credit terms. This helped Sincere do very well, far better than THG and Cortina (also the HK peers like Emperor Watch and Oriental Watch).

In 2007 the Tays sold Sincere Watch to Peacemark for a huge premium (22.9x PE, 4.3x book), but it collapsed soon after when it couldn't repay the loan it took to buy Sincere Watch.

In 2009 the Tays bought back Sincere Watch for a song (5.2x PE, 0.74x book). Other bidders were said to offer as much as 2x book, but apparently the key factor was support from Franck Muller, so the low bid won.

In 2012 the Tays sold Sincere Watch for the second time, to Pollyanna Chu. After the deal, both Rolex and Patek Philippe terminated the relationship. As you can imagine, business got harder without these heavyweight brands.

In 2020 Sincere Watch was sold yet again, this time to Cortina. The price: 1.0x book value.

Can we learn something from this history?

1. The brandowners can make or break a given dealer. Franck Muller helped Tay Liam Wee twice: initially with long credit terms, and later by blocking other bidders. Similarly, Rolex and PP's departure hurt Sincere Watch: when Cortina bought it, Sincere was losing money.

2. The most logical buyer of a luxury watch dealer is another luxury watch dealer, due to the obvious synergies. But such a buyer can also buy watches at cost from the principals, so there is no reason to pay a premium. In fact it would be more appropriate to pay a discount, since it takes a long time to liquidate excess watches.

As for acquisition by a luxury goods company like LVMH, the target would be the brands themselves and not the dealers.

Can investing in THG be successful? Yes, of course, if you pay the right price.

The underlying business is simply not that great, and the markets where THG can operate are saturated. THG has been buying property, partly to hedge against rising rents and partly because it can't profitably add new stores.

So what is the right price? I would say that based on fundamentals, the *ceiling* would be somewhat below book value, for the reasons already outlined above. Paying a significant premium, like Peacemark and Pollyanna did, is not likely to work out well.

The luxury watch business runs on inventory. A new owner cannot expect to magically earn more on the same assets: principals don't give you a discount, customers don't pay you a premium. Pay your staff less, they leave and take the customers with them. Move to cheaper locations, you offend the principals. Basically, your hands are tied. So as a buyer of such a business, if you pay more, you will earn less. The end.

As always, YMMV.